Chapter 22

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Auditing and Assurance Services, 14e (Arens)

Chapter 23 Audit of Cash Balances
Learning Objective 23-1
1) Which of the following misstatements is most likely to be uncovered during an audit of a client's bank
reconciliation?
A) Duplicate payment of a vendor's invoice.
B) Billing a customer at a lower price than indicated by company policy.
C) Failure to record a collection of a note receivable by the bank on the client's behalf.
D) Payment to an employee for more than the hours actually worked.
Answer: C
Terms: Bank reconciliation
Diff: Easy
Objective: LO 23-1
AACSB: Reflective thinking skills
2) Which of the following is likely to be detected as part of the audit of the bank reconciliation?
A) Failure to bill a customer
B) Duplicate payment of a vendor invoice
C) Cash received by the client after year end, but included in cash receipts in the current year
D) An embezzlement of cash by intercepting cash receipts from customers before they are recorded
Answer: C
Diff: Easy
Objective: LO 23-1
3) Which of the following cycles does not affect cash in bank?

A) Capital acquisitions cycle.
B) Inventory and warehousing.
C) Payroll and personnel cycle.
D) Acquisitions and disbursements.
Answer: B
Terms: Cash in bank
Diff: Easy
Objective: LO 23-1
4) Which of the following would normally be discovered as part of the audit of the bank reconciliation?
A) Failure to bill a customer.
B) Failure to include a deposit in transit on the bank reconciliation.
C) Duplicate payment of a vendor's invoice.
D) Payment to an employee for more hours than she worked.
Answer: B
Diff: Easy
Objective: LO 23-1
1
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5) The general cash account is considered a significant account in almost all audits:
A) where the ending balance is material.
B) even when the ending balance is immaterial.
C) except those of not-for-profit organizations.
D) where either the beginning or ending balance is material.
Answer: B
Terms: General cash account
Diff: Moderate
Objective: LO 23-1
6) Which of the following errors would be least likely to be discovered during the audit of the
acquisitions and payments cycle?
A) Duplicate payment of a vendor's invoice.
B) Improper payments of officers' personal expenditures.
C) Payment of interest to a related party for an amount in excess of the going rate.
D) Payment for raw materials that were not received.
Answer: C
Terms: Acquisitions and payments cycle
Diff: Moderate
Objective: LO 23-1
7) Bank reconciliation audit tests are designed to detect misstatements other than through the improper
payment of cash or failure to receive cash normally would not be detected as part of the tests of the bank
reconciliation. List below at least THREE misstatements that are designed to be detected by bank
reconciliation.
Answer: Failure to include a check that has not cleared the bank on the outstanding checklist, even
though it has been recorded on the cash disbursement journal
Cash received by the client subsequent to the balance sheet date, but recorded as cash receipts in the
current year
Deposits recorded as cash receipts near the end of the year, deposited in the bank in the same month, and
included in the bank reconciliation as a deposit in transit
Payments on notes payables debited directly to the bank balance by the bank but not entered in the
client's records
Terms: Bank reconciliation audit tests; Detected misstatements
Diff: Easy
Objective: LO 23-1
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8) "Failure to bill a customer" is an example of an error that results in the failure to receive cash, but
would not be discovered as part of the audit of the bank reconciliation. State three other examples of
errors or irregularities that result in the improper payment of, or failure to receive, cash, but that would
not be discovered during the audit of the bank reconciliation. How are these types of misstatements
normally uncovered in the audit?
Answer:
An embezzlement of cash by interception of cash receipts from customers before they are recorded
with the account charged off as a bad debt.
Duplicate payment of a vendor's invoice.
Improper payments of officers' personal expenditures.
Payment for raw materials that were not received.
Payment to an employee for more hours than he or she worked.
Payment of interest to a related party for an amount in excess of the going rate.
If these misstatements are to be uncovered in the audit, their discovery must occur through tests of
controls and substantive tests of transactions.
Terms: Improper payment or failure to receive cash but not discovered during audit of bank reconciliation
Diff: Challenging
Objective: LO 23-1
1) Which of the following is not a "cash equivalent"?

A) Time deposits
B) Certificates of deposit
C) Money market funds
D) Marketable securities
Answer: D
Terms: Cash equivalent
Diff: Moderate
Objective: LO 23-2
2) An imprest petty cash fund would least likely be used to pay for which of the following items?
A) Minor office supplies
B) Monthly interest expense
C) Stamps for small mailings
D) Small contributions to a local charity
Answer: B
Terms: Imprest petty cash fund
Diff: Moderate
Objective: LO 23-2
3
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3) Under which of the following circumstances would an auditor be most likely to intensify an
examination of a $500 imprest petty cash fund?
A) Reimbursement occurs twice each week.
B) The custodian endorses reimbursement checks.
C) Reimbursement vouchers are not prenumbered.
D) The custodian occasionally uses the cash fund to cash employee checks.
Answer: A
Terms: Examination of imprest petty cash fund
Diff: Challenging
Objective: LO 23-2
AACSB: Analytic skills
4) Describe each of the major types of cash accounts maintained by business entities.
Answer:
General cash account. This is the focal point of cash for most organizations because virtually all cash
receipts and disbursements flow through this account.
Imprest payroll account. As a means of improving internal control, many companies establish a
separate imprest bank account for making payroll payments to employees. In such an account, a fixed
balance, such as $1,000, is maintained. Immediately before each pay period, one check is drawn on the
general cash account to deposit the total amount of the net payroll in the imprest payroll account.
Branch bank account. For a company operating in multiple locations, it is often desirable to have a
separate bank balance at each location. Branch bank accounts are useful for building public relations in
local communities and permitting the centralization of operations at the branch level.
Imprest petty cash fund. This fund is used for small cash acquisitions that can be paid more
conveniently and quickly by cash than by check, or for the convenience of employees in cashing personal
or payroll checks.
Cash equivalents. Excess cash accumulated during certain parts of the operating cycle that will be
needed in the reasonably near future is often invested in short-term, highly liquid cash equivalents such
as time deposits, certificates of deposit, and money market funds.
Terms: Major types of cash accounts
Diff: Moderate
Objective: LO 23-2
5) One disadvantage of using an imprest bank account is the increased time needed to reconcile bank
accounts.
A) True
B) False
Answer: B
Terms: Imprest bank account
Diff: Moderate
Objective: LO 23-2
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6) Examples of cash equivalents include time deposits, certificates of deposit, and marketable securities.
A) True
B) False
Answer: B
Terms: Cash equivalents
Diff: Challenging
Objective: LO 23-2
1) The test of details of balances procedure that requires the auditor to foot the outstanding check list and
deposits in transit is an attempt to satisfy which audit objective?
A) Cutoff.
B) Presentation and disclosure.
C) Detail tie-in.
D) Completeness.
Answer: C
Terms: Test of details of balances procedure
Diff: Easy
Objective: LO 23-3
2) The audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and
agrees with the general ledger can be tested by which of the following procedures?
A) Performing tests for kiting.
B) Receiving and testing a cutoff bank statement.
C) Footing the outstanding checks list and the list of deposits in transit.
D) Examining the minutes of the board of directors for restrictions on the use of cash.
Answer: C
Terms: Audit objective; Cash in bank; Reconciliation
Diff: Easy
Objective: LO 23-3
3) The test details of balances procedure that requires the auditor to trace the book balance on the
reconciliation to the general ledger is an attempt to satisfy the audit objective of:
A) detail tie-in.
B) existence.
C) completeness.
D) accuracy.
Answer: A
Terms: Test details of balances procedure; Reconciliation
Diff: Easy
Objective: LO 23-3
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4) Which of the following statements is correct?

A) Auditors must obtain bank confirmations on every audit.
B) Auditors obtain bank confirmations at their discretion.
C) Auditing standards do not address specific requirements regarding bank confirmations.
D) Auditing standards do not require bank confirmations except when there is an unusually large
number of inactive bank accounts.
Answer: D
Terms: Bank confirmation
Diff: Easy
Objective: LO 23-3
5) A partial-period bank statement and the related canceled checks, duplicate deposit slips, and other
documents included in bank statements, mailed by the bank directly to the CPA firm's office, is called:
A) a four-column proof of cash.
B) a year-end bank statement.
C) a cutoff bank statement.
D) a short-period bank statement.
Answer: C
Terms: Partial-period bank statement
Diff: Easy
Objective: LO 23-3
6) When the auditor believes the year-end bank reconciliation may be intentionally misstated, it is
appropriate to perform extended tests of the year-end bank reconciliation. Assuming the client has a
October 31 year-end, these extended tests would not include:
A) comparing all September 30 reconciling items with canceled checks and other documents in the
October bank statement.
B) comparing all canceled checks and deposit slips in the October bank statement with the October cash
disbursements and receipts records.
C) carrying out all proper procedures subsequent to the end of the year with the use of the bank cutoff
statement.
D) determining that all outstanding checks had cleared by the date of the bank cutoff statement.
Answer: D
Terms: Bank reconciliation; Extended tests
Diff: Easy
Objective: LO 23-3
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7) Which of the following statements is correct?

A) Bank personnel are responsible for providing reasonable assurance that a response to a bank
confirmation is accurate.
B) Bank personnel are responsible for providing complete assurance that a bank confirmation is complete.
C) Bank personnel are not responsible for searching their records for bank balances or loans beyond those
included on the bank confirmation.
D) Bank personnel are not responsible for providing information related to interest on the bank
confirmation.
Answer: C
Diff: Easy
Objective: LO 23-3
8) In addition to confirming bank balances of your audit client, a bank confirmation would normally
contain:
A) the client's bank loans with due date, interest rate, and collateral requested.
B) the client's credit history as regards to paying back loans.
C) the client's managements bank account information.
D) the client's business prospects.
Answer: A
Diff: Easy
Objective: LO 23-3
9) Which of the following balance-related audit objectives typically is assessed as having high inherent
risk for cash?
A) Existenc
B) Cutoff
C) Detail tie-in
D) Presentation and disclosure
Answer: A
Terms: Balance-related audit objectives; High inherent risk for cash
Diff: Moderate
Objective: LO 23-3
10) Because cash is the most desirable asset for people to steal, it has a higher:
A) control risk.
B) inherent risk.
C) detection risk.
D) liquidity risk.
Answer: B
Terms: Cash; Risk
Diff: Moderate
Objective: LO 23-3
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11) The starting point for the verification of the balance in the general bank account is to obtain:
A) a bank reconciliation from the client.
B) the client's cash account from the general ledger.
C) a cutoff bank statement directly from the bank.
D) the client's year-end bank statement and reconcile it.
Answer: A
Terms: Verification of balance in the general bank account
Diff: Moderate
Objective: LO 23-3
12) In an effort to satisfy the completeness objective, the auditor could perform which of the following
test of details of balance procedures?
A) Trace the book balance on the reconciliation to the general ledger.
B) Trace outstanding checks to subsequent period bank statements.
C) Perform a four-column proof of cash.
D) Review financial statements to make sure that material savings accounts and certificates of deposit are
disclosed separately.
Answer: C
Terms: Completeness objective; Test of details of balance procedures
Diff: Moderate
Objective: LO 23-3
13) The audit procedure which requires the auditor to record the last check number used on the last day
of the year and subsequently trace to the outstanding checks and the cash disbursements records is
performed to satisfy the audit objective of:
A) detail tie-in.
B) existence.
C) completeness.
D) cutoff.
Answer: D
Terms: Audit procedure to record last check number used
Diff: Moderate
Objective: LO 23-3
14) The direct receipt of a confirmation from every bank with which the client does business is:
A) required by auditing standards for every audit.
B) not necessary unless material fraud is suspected.
C) recommended but not required by auditing standards.
D) necessary for every audit except when there are an unusually large number of active accounts.
Answer: C
Terms: Direct receipt of confirmation from every bank
Diff: Moderate
Objective: LO 23-3
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15) The reason for testing the client's bank reconciliation is to verify whether the client's recorded bank
balance is the same amount as the actual cash in bank, except for deposits in transit, checks outstanding,
and other reconciling items. The information needed to complete the tests of the reconciliation are
provided by the:
A) client's records and ledgers for the year under audit.
B) cutoff bank statement.
C) client's records and ledgers for the subsequent year.
D) canceled checks for the year under audit.
Answer: B
Terms: Bank reconciliation; Deposits in transit; Outstanding checks
Diff: Moderate
Objective: LO 23-3
16) Which of the following items would not normally appear on bank reconciliations?
A) Balance per bank
B) List of deposits in transit
C) Outstanding deposits
D) Outstanding checks
Answer: C
Diff: Moderate
Objective: LO 23-3
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17) If a bank does not respond to a bank confirmation request, the auditor would most likely:
A)
Ask the client to communicate
with the bank to ask them to
Perform alternative Send a second complete and return the
procedures request confirmation
No Yes Yes
B)
No No Yes
C)
Yes No Yes
D)
Yes Yes No
Answer: A
Terms: Bank confirmation request
Diff: Moderate
Objective: LO 23-3
18) The most important balance-related audit objectives in the audit of cash include all but which of the
following?
A) Existence
B) Accuracy
C) Completeness
D) Occurrence
Answer: D
Terms: Balance-related audit objectives in the audit of cash
Diff: Moderate
Objective: LO 23-3
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19) During his examination of a January 19, 2008 cutoff bank statement, an auditor noticed that the
majority of checks listed as outstanding at December 31, 2007, had not cleared the bank. This would
indicate:
A) a high probability of kiting.
B) a high probability of lapping.
C) that the 2007 cash disbursements records had been closed prior to December 31, 2007.
D) that the 2007 cash disbursements records had been held open past December 31, 2007.
Answer: D
Terms: Examination of cutoff bank statement; Checks outstanding
Diff: Challenging
Objective: LO 23-3
20) Which of the following errors would be least likely to be discovered during the tests of the bank
reconciliation?
A) Payment was made to an employee for more hours than he worked.
B) Cash received by the client subsequent to the balance sheet date was recorded as cash receipts in the
current year.
C) Payments on notes payable were debited directly to the bank balance by the bank were not entered in
the client's records.
D) Deposits were recorded in the cash receipts records near the end of the year, deposited in the bank,
and were included in the bank reconciliation as a deposit in transit.
Answer: A
Diff: Challenging
Objective: LO 23-3
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21) Which of the following balance-related objectives applies to auditing the general cash account?
A)
Rights Classification Realizable value
Yes No Yes
B)
No Yes No
C)
Yes Yes Yes
D)
No No No
Answer: D
Terms: Balance-related objective applied to auditing the general cash account
Diff: Challenging
Objective: LO 23-3
22) The standard bank confirmation form has been agreed upon by the:
A) SEC and FASB.
B) AICPA and the SEC.
C) SEC and the American Bankers' Association.
D) AICPA and the American Bankers' Association.
Answer: D
Terms: Standard bank confirmation
Diff: Challenging
Objective: LO 23-3
23) Auditors tests of the client's bank reconciliation is done to verify whether the client's recorded bank
balance is the same amount as the actual cash in the bank. Which of the following would not explain a
difference between the company's cash balance and the bank's balance for the client?
A) Deposits in transit
B) Cash collected on a Note Receivable by the bank
C) Other reconciling items
D) Outstanding checks
Answer: B
Terms: Contact with banks to open company bank accounts
Diff: Moderate
Objective: LO 23-3
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24) If an auditor "proves" the bank statement in the month subsequent to the balance sheet date, it is
primarily a test for:
A) errors.
B) omissions.
C) kiting.
D) intentional misstatements.
Answer: D
Terms: Auditor proves the bank statement
Diff: Challenging
Objective: LO 23-3
25) Internal controls over year-end cash balances in the general account can be divided into two
categories. List the two below.
Answer:
1. Controls over transactions cycle affecting the recording of cash receipts and cash disbursements.
2. Independent bank reconciliations.
Terms: Internal controls over year-end cash balances
Diff: Easy
Objective: LO 23-3
26) Explain what is meant by a cutoff bank statement, and discuss the purpose of the cutoff bank statement
in the audit of cash.
Answer: A cutoff bank statement is a partial-period bank statement and the related copies of canceled
checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank
directly to the CPA firm's office. The purpose of the cutoff bank statements is to verify the reconciling
items on the client's year-end bank reconciliation with evidence that is not accessible to the client.
Terms: Cutoff bank statement; Audit of cash
Diff: Easy
Objective: LO 23-3
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27) Explain the purpose of testing the client's bank reconciliation, and discuss the major audit procedures
involved.
Answer: The purpose of testing the client's reconciliation is to verify whether the client's recorded bank
balance is the same amount as the actual cash in the bank. Procedures include:
Verify that the client's bank reconciliation is mathematically accurate.
Trace the balance on the bank confirmation and/or the beginning balance on the cutoff statement to
the balance per bank on the bank reconciliation to ensure they are the same.
Trace checks written and recorded before year-end and included with the cutoff bank statement to
the list of outstanding checks on the bank reconciliation and to the cash disbursements journal in the
period or periods prior to the balance sheet date.
Investigate all significant checks included on the outstanding checks list that have not cleared the
bank on the cutoff statement.
Trace deposits in transit to the cutoff bank statement.
Account for other reconciling items on the bank statement and bank reconciliation.
Terms: Testing client's bank reconciliation and major audit procedures
Diff: Challenging
Objective: LO 23-3
28) Many auditors prove the subsequent period bank statement if a cutoff statement is not received
directly from the bank. Discuss the purpose of proving the subsequent period statement, and explain the
audit procedures performed during the proof.
Answer: The purpose of such a proof is to test whether the client's employees have omitted, added, or
altered any of the documents accompanying the statement. The audit procedures include footing all the
canceled checks, debit memos, deposits, and credit memos; verifying that the bank statement balances
when the footed totals are used; and reviewing the items included in the footings to make sure that they
were cancelled by the bank in the proper period and do not include any erasures or alterations.
Terms: Prove subsequent period bank statement and audit procedures
Diff: Challenging
Objective: LO 23-3
29) If internal controls over cash-related transactions are adequate, the auditor is justified in reducing the
audit tests for the year-end bank reconciliation.
A) True
B) False
Answer: A
Terms: Internal controls over cash-related transactions; Audit tests for year-end bank reconciliation
Diff: Easy
Objective: LO 23-3
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30) Many of the auditor's audit procedures in the audit of cash center around the client's bank
confirmations.
A) True
B) False
Answer: B
Terms: Audit of cash; Bank confirmations
Diff: Easy
Objective: LO 23-3
31) Tracing outstanding checks to subsequent period bank statements tests the cutoff audit objective.
A) True
B) False
Answer: A
Terms: Tracing outstanding checks; Cutoff audit objective
Diff: Easy
Objective: LO 23-3
32) When auditing the year-end cash balance, one of the areas of focus is on the accuracy objective.
A) True
B) False
Answer: A
Terms: Auditing year-end cash balance; Accuracy objective
Diff: Moderate
Objective: LO 23-3
33) The auditor must extend the audit procedures in the audit of year-end cash when there are
inadequate internal controls.
A) True
B) False
Answer: A
Terms: Audit procedures; Inadequate internal controls
Diff: Moderate
Objective: LO 23-3
34) The three most important audit objectives for cash are accuracy, existence, and classification.
A) True
B) False
Answer: B
Terms: Audit objectives for cash
Diff: Moderate
Objective: LO 23-3
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35) The starting point for the verification of the balance in the general bank account is to obtain a bank
cut-off statement.
A) True
B) False
Answer: B
Terms: General bank account; Bank cut-off statement
Diff: Moderate
Objective: LO 23-3
36) When auditing the general cash account, receipt of a standard bank confirmation is the starting point
for verifying the company's general cash account balance.
A) True
B) False
Answer: B
Terms: General cash account; Standard bank confirmation
Diff: Moderate
Objective: LO 23-3
37) To test the client's list of outstanding checks on the bank reconciliation for completeness, the auditor
should trace from the list to the checks included with the cutoff bank statement.
A) True
B) False
Answer: B
Terms: Outstanding checks on bank reconciliation for completeness; Cutoff bank statement
Diff: Moderate
Objective: LO 23-3
38) The client may mail the bank confirmation requests if the auditor believes doing so will increase the
likelihood that the confirmation will be returned promptly.
A) True
B) False
Answer: B
Diff: Moderate
Objective: LO 23-3
39) Auditors usually design bank confirmations that address the client's specific circumstances.
A) True
B) False
Answer: B
Diff: Moderate
Objective: LO 23-3
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40) Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation should appear as deposits
on the cutoff bank statement.
A) True
B) False
Answer: A
Terms: Deposits-in-transit; Year-end bank reconciliation; Cutoff bank statement
Diff: Moderate
Objective: LO 23-3
41) Auditors are not always required to obtain bank confirmations.

A) True
B) False
Answer: A
Diff: Challenging
Objective: LO 23-3
42) If an unusually large portion of the checks listed as outstanding on the year-end bank reconciliation
have not cleared the bank by the cutoff date, one possible cause could be that kiting is occurring.
A) True
B) False
Answer: B
Terms: Kiting; Outstanding checks
Diff: Challenging
Objective: LO 23-3
1) Auditors are likely to prepare a proof of cash when the client has:
A) material control weaknesses in cash receipts and cash disbursements.
B) material control weaknesses in accounts receivable and revenue.
C) material control weaknesses in accounts payable and inventory.
D) material control weaknesses in payroll.
Answer: A
Terms: Proof of cash
Diff: Easy
Objective: LO 23-4
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2) The auditor uses a proof of cash to determine whether:

A)
All recorded cash disbursements were All amounts that were paid by the bank
paid by the bank. were recorded.
Yes Yes
B)
No No
C)
Yes No
D)
No Yes
Answer: A
Diff: Easy
Objective: LO 23-4
3) A proof of cash represents:

A) a test of controls and substantive test of transactions.
B) a substantive test of transactions.
C) a substantive test of transactions and test of details of balances.
D) a test of details of balances.
Answer: C
Diff: Easy
Objective: LO 23-4
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4) Which of the following verifications would generally not be performed by the auditor in the month
subsequent to the balance sheet date?
A) Foot the lists of all canceled checks, debit memos, deposits, and credit memos.
B) verify the bank statement balances when the footed totals are used.
C) Verify the book statement balances tie to the cash receipts and disbursements journals for the year
under audit.
D) Review the items included in the footings to make sure that they were cancelled by the bank
Answer: C
Terms: Verifications performed in the month subsequent to balance sheet date
Diff: Moderate
Objective: LO 23-4
5) A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor
must extend his or her procedures in the audit of year-end cash to determine the possibility of a material
fraud when there are:
A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) no imprest accounts used for payroll.
D) inadequate internal controls.
Answer: D
Terms: Material fraud; Extend procedures in audit of year-end cash
Diff: Moderate
Objective: LO 23-4
6) The audit and accounting concern addressed in a monthly proof of cash is with:
A) adjusting account balances.
B) reconciling the amounts per books and bank.
C) determining the month-end balance.
D) identifying cash transfers.
Answer: B
Terms: Monthly proof of cash
Diff: Easy
Objective: LO 23-4
7) A proof of cash is effective at identifying which of the following misstatements?

A) checks written for incorrect amounts
B) checks issued to invalid vendors
C) fraudulent checks
D) Checks recorded by the books for an amount different than the check.
Answer: D
Diff: Moderate
Objective: LO 23-4
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8) The process of transferring money from one bank account to another and improperly recording the
transaction is referred to as:
A) kiting.
B) lapping.
C) scamming.
D) embezzling.
Answer: A
Terms: Transferring money from one bank account to another and improperly recording the transaction
Diff: Moderate
Objective: LO 23-4
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9) Which of the following cash transfers results in a misstatement of cash on December 31, 2007?
A)
Bank Transfer Schedule
Recorded Disbursement Date
transfer paid by transfer received
in books by bank in books by bank
12/31/07 1/04/08 12/31/07 12/31/07
B)
1/04/08 1/05/08 12/31/07 1/04/08
C)
12/31/07 1/05/08 12/31/07 1/04/08
D)
1/04/08 1/11/08 1/04/08 1/04/08
Answer: C
Terms: Cash transfers; Misstatement
Diff: Challenging
Objective: LO 23-4
The following information applies to the questions below:
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Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late
December 2007 and early January 2008:
Bank Account One Bank Account Two
Disbursing Date Receiving Date
(Month/Day) (Month/Day)
Per Bank Per Books Per Bank Per Books
1. 12/31 12/30 12/31 12/30
2. 1/2 12/30 12/31 12/31
3. 1/3 12/31 1/2 1/2
4. 1/3 12/31 1/2 12/31
10) Based on the schedule of interbank transfers above, which of the cash transfers indicates an error in
cash cutoff at December 31, 2007?
A) 1
B) 2
C) 3
D) 4
Answer: C
Terms: Interbank cash transfers
Diff: Challenging
Objective: LO 23-4
11) Based on the schedule of interbank transfers above, which of the cash transfers would appear as a
deposit in transit on the December 31, 2007 bank reconciliation?
A) 1
B) 2
C) 3
D) 4
Answer: D
Diff: Challenging
Objective: LO 23-4
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12) Based on the schedule of interbank transfers above, which of the cash transfers would not appear as
an outstanding check on the December 31, 2007 bank reconciliation?
A) 1
B) 2
C) 3
D) 4
Answer: A
Diff: Challenging
Objective: LO 23-4
13) A proof of cash is not an effective procedure for identifying which of the following types of
misstatements?
A) All recorded disbursements were paid by the bank.
B) All recorded cash receipts were deposited.
C) All amounts that were paid by the bank were recorded.
D) Some checks were written for incorrect amounts.
Answer: D
Terms: Proof of cash; Misstatements
Diff: Challenging
Objective: LO 23-4
14) Listing all bank transfers made a few days before and after the balance sheet date and tracing each to
the accounting records for proper recording is a useful approach to test for:
A) kiting.
B) lapping.
C) income smoothing.
D) channel stuffing.
Answer: A
Terms: Bank transfers
Diff: Challenging
Objective: LO 23-4
15) On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and
deposited the check in the company account in bank B to cover a previous theft of cash. The
disbursement has not been recorded. The auditor will best detect this form of kiting by:
A) examining the composition of deposits in both bank A and bank B subsequent to year-end.
B) examining paid checks returned with the bank statement of the next account period after year-end.
C) preparing, from the cash disbursements records, a summary of bank transfers for one week prior to
and subsequent to year-end.
D) comparing the detail of cash receipts as shown by the client's cash receipts records with the detail on
the confirmed duplicate deposit tickets for three days prior to and subsequent to year-end.
Answer: B
Terms: Cash disbursements; Kiting
Diff: Challenging
Objective: LO 23-4
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16) Auditors will often prepare a Proof of Cash when the client has material internal control weaknesses
in cash receipts and cash disbursements. The purpose of the proof of cash is to determine the client's
accounting records for cash are reliable. List below the four requirements the proof of cash is designed to
provide for the auditor.
Answer: All recorded cash receipts were deposited
All deposits in the bank were recorded in the accounting records
All recorded cash disbursements were paid by the bank
All amounts that were paid by the bank were recorded
Terms: Proof of cash requirements
Diff: Easy
Objective: LO 23-4
17) A proof of cash includes four reconciliation tasks. List below at least TWO of those tasks.
Answer:
1. Reconcile the balance on the bank statement with the general ledger balance at the beginning of the
proof- of- cash period
2. Reconcile cash receipts deposited per the bank with the receipts recorded in the cash receipts journal
for a given period of time
3. Reconcile electronic payments and cancelled checks clearing the bank with those recorded in the cash
disbursements journal for a given period
4. Reconcile the balance on the bank statement with the general ledger balance at the end of the proof-
of- cash period
Terms: Proof of cash requirements
Diff: Moderate
Objective: LO 23-4
18) What should be audited on an interbank transfer schedule?

Answer:
1. The accuracy of the information on the interbank transfer schedule should be verified.
2. The interbank transfers must be recorded in both the receiving and disbursing banks.
3. The date of the recording of the disbursements and receipts for each transfer must be in the same
fiscal year.
4. Disbursement on the interbank transfer schedule should be correctly included in or excluded from
year-end bank reconciliations as outstanding checks.
5. Receipts on the interbank transfer schedule should be correctly included in or excluded from year-
end bank reconciliations as deposits in transit.
Terms: Audit of interbank transfer schedule
Diff: Moderate
Objective: LO 23-4
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19) Explain kiting, and discuss how it is performed.

Answer: Kiting is the transfer of money from one bank to another and improperly recording the
transaction to cover a theft of cash. Near the balance sheet date, a check is drawn on one bank account
and immediately deposited in a second account for credit before the end of the accounting period. In
making this transfer, the embezzler is careful to make sure that the check is deposited at a late enough
date so that it does not clear the first bank until after the end of the period. If the interbank transfer is not
recorded until after the balance sheet date, the amount of the transfer is recorded as an asset in both
banks, overstating the kiter's total cash balance.
Terms: Kiting
Diff: Moderate
Objective: LO 23-4
20) Discuss how an auditor can test for kiting.

Answer: To test for kiting, the auditor obtains a schedule of interbank transfers that lists all interbank
transfers made a few days before and after the balance sheet date, and trace each to the accounting
records for proper recording. Specific items of interest include:
The accuracy of the information on the bank transfer schedule should be verified by reference to the
cash disbursements and cash receipts records.
The interbank transfers must be recorded in both the receiving and disbursing banks.
The date of the recording of the disbursements and receipts for each transfer must be in the same
fiscal year.
Disbursements on the bank transfer schedule should be correctly included in or excluded from year-
end bank reconciliations as outstanding checks.
Receipts on the bank transfer schedule should be correctly included in or excluded from year-end
bank reconciliations as deposits in transit.
Terms: Kiting
Diff: Moderate
Objective: LO 23-4
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21) Match six of the terms (a-k) with the descriptions/definitions provided below (1-6):
a. Bank reconciliation
b. Branch cash account
c. Cash equivalents
d. Cutoff bank statement
e. General cash account
f. Imprest payroll account
g. Imprest petty cash fund
h. Kiting
i. Proof of cash
j. Standard bank confirmation form
k. Lapping
________ 1. A fund of cash maintained within the company for small cash acquisitions, expenses, or to
cash employees' checks.
________ 2. A form approved by the AICPA and American Bankers' Association through which the bank
responds to the auditor about bank balance and loan information.
________ 3. Excess cash invested in short-term, highly liquid investments such as time deposits,
certificates of deposit, and money market funds.
________ 4. The primary bank account for most organizations.
________ 5. The transfer of money from one bank account to another and improperly recording the
transfer so that the amount is recorded as an asset in both accounts.
________ 6. The document usually prepared by client personnel of the differences between the cash
balance recorded in the general ledger and the amount in the bank account.
Answer:
1. g
2. j
3. c
4. e
5. h
6. a
Terms: Bank reconciliation; Cash equivalents; General cash account; Imprest petty cash fund; Kiting; Standard bank
confirmation form
Diff: Moderate
Objective: LO 23-2, LO 23-3, and LO 23-4
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22) A proof of cash involves a combination of substantive tests of transactions and tests of details of
balances.
A) True
B) False
Answer: A
Terms: Proof of cash; Substantive tests of transactions and tests of details of balances
Diff: Easy
Objective: LO 23-4
23) A proof of cash includes a reconciliation of cash receipts deposited in the bank with the cash
disbursements records for a given period.
A) True
B) False
Answer: B
Terms: Proof of cash; Reconciliation of cash receipts deposited in the bank with cash disbursements
Diff: Easy
Objective: LO 23-4
24) The transfer of money from one bank account to another and improperly recording the transfer so
that the amount is recorded as an asset in both banks is referred to as kiting.
A) True
B) False
Answer: A
Terms: Kiting
Diff: Easy
Objective: LO 23-4
25) Tests for kiting are performed using only a schedule of intrabank transfers.
A) True
B) False
Answer: B
Terms: Tests for kiting
Diff: Moderate
Objective: LO 23-4
26) A proof of cash helps the auditor determine whether all recorded cash receipts were deposited in the
bank and whether all recorded cash disbursements were paid by the bank.
A) True
B) False
Answer: A
Diff: Moderate
Objective: LO 23-4
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27) A proof of cash receipts is not useful for uncovering the theft of cash receipts or the recording and
deposit of an improper amount of cash.
A) True
B) False
Answer: A
Terms: Proof of cash receipts; Theft of cash receipts
Diff: Challenging
Objective: LO 23-4
28) A proof of cash disbursements is not effective for discovering checks written for an improper amount,
fraudulent checks, or misstatements in which the dollar amount appearing in the cash disbursements
records is incorrect.
A) True
B) False
Answer: A
Terms: Proof of cash disbursements
Diff: Challenging
Objective: LO 23-4
1) Tests of the payroll bank reconciliation usually require considerable time if there is an imprest payroll
account in use.
A) True
B) False
Answer: B
Terms: Tests of payroll bank reconciliation; Imprest payroll account
Diff: Easy
Objective: LO 23-5
1) The emphasis in verifying petty cash is normally on which of the following?

A) Year-end balance
B) Controls over petty cash
C) Transactions for the period
D) Balance sheet classifications
Answer: B
Terms: Verifying petty cash
Diff: Moderate
Objective: LO 23-6
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2) The most important controls for petty cash relate to:

A)
The use of a separate bank account The use of an imprest fund
Yes Yes
B)
No No
C)
Yes No
D)
No Yes
Answer: D
Terms: Controls for petty cash
Diff: Moderate
Objective: LO 23-6
3) The most important control for petty cash is that two individuals maintain joint custody of the asset.
A) True
B) False
Answer: B
Terms: Control for petty cash
Diff: Easy
Objective: LO 23-6
4) While petty cash is often immaterial in amount, the auditor verifies the account primarily because it is
easy to do so.
A) True
B) False
Answer: B
Terms: Petty cash
Diff: Easy
Objective: LO 23-6
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5) When the amount in the petty cash account is immaterial, most auditors would choose to test the
account for reasons of client expectations.
A) True
B) False
Answer: A
Terms: Petty cash account
Diff: Moderate
Objective: LO 23-6
6) When auditing petty cash, the emphasis should be on testing controls over petty cash transactions
rather than the ending balance in the account.
A) True
B) False
Answer: A
Terms: Testing controls over petty cash transactions
Diff: Moderate
Objective: LO 23-6
7) Audit tests of the petty cash fund are typically performed on the balance sheet date.
A) True
B) False
Answer: B
Terms: Audit tests of petty cash fund
Diff: Moderate
Objective: LO 23-6
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Auditing and Assurance Services, 14e (Arens)

Learning Objective 23-1

3) Which of the following cycles does not affect cash in bank?

Learning Objective 23-2

1) Which of the following is not a "cash equivalent"?

Learning Objective 23-3

4) Which of the following statements is correct?

7) Which of the following statements is correct?

41) Auditors are not always required to obtain bank confirmations.

Learning Objective 23-4

2) The auditor uses a proof of cash to determine whether:

3) A proof of cash represents:

7) A proof of cash is effective at identifying which of the following misstatements?

The following information applies to the questions below:

18) What should be audited on an interbank transfer schedule?

19) Explain kiting, and discuss how it is performed.

20) Discuss how an auditor can test for kiting.

________ 4. The primary bank account for most organizations.

Learning Objective 23-5

Learning Objective 23-6

1) The emphasis in verifying petty cash is normally on which of the following?

2) The most important controls for petty cash relate to:

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